Thursday, July 21, 2016

Is Microsoft on track to reach its stated goal of $20 billion in annual revenues from the cloud by FY2018?

The big message from Microsoft's quarterly results issued this week is that the Microsoft cloud is winning significant customer support and is now on a $12 billion annual run rate.  (Commercial cloud annualized revenue run rate is calculated by taking revenue in the final month of the quarter multiplied by twelve for Office 365 commercial, Azure, Dynamics Online, and other cloud properties.) This means Microsoft is catching up to Amazon and Azure could surpass AWS in revenue terms in the near future.  Nadella's stated ambition is for Microsoft to achieve $20 billion in commercial cloud revenue in FY18 -- and he believes the company is on track to doing so.

“This past year was pivotal in both our own transformation and in partnering with our customers who are navigating their own digital transformations,” said Satya Nadella, chief executive officer at Microsoft. “The Microsoft Cloud is seeing significant customer momentum and we’re well positioned to reach new opportunities in the year ahead.”

Here are some of the key metrics revealed this week:

·         Office consumer products and cloud services revenue grew 19% (up 18% in constant currency) with Office 365 consumer subscribers increasing to 23.1 million
·         Server products and cloud services revenue increased 5% (up 8% in constant currency) driven by double-digit annuity revenue growth
·         Azure revenue grew 102% (up 108% in constant currency) with Azure compute usage more than doubling year-over-year
·         Enterprise Mobility customers nearly doubled year-over-year to over 33,000, and the installed base grew nearly 2.5x year-over-year
·         70% of Office enterprise renewals are in the cloud. New Office 365 enterprise customers include Facebook, Hersey’s and Discovery Communications

·         The Intelligent Cloud segment delivered slightly more than $6.7 billion in revenue, growing 7% and 10% in constant currency. 

·         At least 60% of Fortune 1000 firms are now using at least three of Microsoft's cloud offerings

·         Microsoft now has 33,000 customers for its Enterprise Mobility Solution -- roughly double the number over the past year.

·         Nearly one third of customer virtual machines on Azure are now running Linux.

·         Office commercial products and cloud services revenue grew 5% (up 9% in constant currency) driven by Office 365 commercial revenue growth of 54% (up 59% in constant currency)

·         Office consumer products and cloud services revenue grew 19% (up 18% in constant currency) with Office 365 consumer subscribers increasing to 23.1 million
Office commercial products and cloud services revenue grew 5% (up 9% in constant currency) driven by Office 365 commercial revenue growth of 54% (up 59% in constant currency)

Globalization Remains a Key Advantage for Azure

Microsoft states that one of Azure key advantages it spans multiple jurisdiction, covering more countries and regions with local support than any other cloud provider. This enables Azure to support regulatory requirements with the maturity and experience that are simply lacking in the other quickly growing clouds.

For instance, Microsoft is the only big cloud provider that operates in China under Chinese law and in Germany under German law.  The company is currently at 26 global data center regions and has announced plans for 34 data centers, but whether this number continues to expand depends on continued cloud growth and the development of regulatory issues.

Regulatory trouble could hamper Microsoft’s top competitors, especially Google and Amazon.

While Microsoft says that it is in-step with global regulators, recent news reports suggest that Google will be facing increased scrutiny from the EU.  A report from CNBC this week stated the Google (Alphabet) could be subject to three separate anti-trust cases from the European Union, accusing the firm of using its dominant position in search, advertising, mapping and mobile OS to stifle competition. Charges have not yet been formally made, so the impact to Google financially and strategically is just speculation.  Likewise, for Amazon, which has moved so aggressive in online commerce across so many markets, the question of which cloud continues to grow the fastest with the widest range of services, may be obscured by other activities underway at the parent companies.

Performance Could Be Significant Differentiator

Recently, Cedexis, a San Francisco-based company providing Internet performance monitoring and optimization, released data company the end-user latency measurements for AWS, Azure, IBM Softlayer, Rackspace, and the Google Cloud Engine, as experienced from different regions across the continental United States. The data, which was collected in March and April of 2016, measured latency to specific cloud data centres.
The Cloud Latency results were reported as follows (best to worst in milliseconds):

Rackspace Cloud – ORD: 56.11

Azure Cloud – US North Central: 56.56

IBM Softlayer – Dallas: 56.89

Google Compute Engine – U: 58:33

Softlayer – Washington: 61.22

Azure Cloud – U.S. East: 62.22

IBM Softlayer – Houston: 62.33

Rackspace Cloud – DWF: 63.22

Rackspace Cloud – IAD: 63.56

AWS EC2 – US East (VA): 63.56

Azure Cloud – US West: 73:11

AWS EC2 – US West (CA): 75.44

AWS EC2 – US West (OR): 84.78

The Cedexis report shows that the Microsoft Azure facilities in general doing better than the pack, and in particular better than its closest market rival, AWS. The western US performed worse than other regions perhaps because of more congested peering points affecting all providers, according to Cedexis.
Nevertheless, performance and security are becoming important differentiators as the big clouds move into real-time service for IoT devices.

Newly Announced IoT deal with Boeing Points in the Right Direction

Microsoft has just scored a bit IoT with Boeing, which has just agreed to use the Azure IoT suite + Cortana for machine learning capabilities. On the partnership, Boeing will move its extensive digital toolset for its airline customers to the Azure cloud.  The companies said this will “improve commercial aviation by enhancing factors like predictive aircraft maintenance, fuel optimization, airline systems and the overall cabin passenger experience.”  Potentially, vast amounts of data from Boeing aircraft will be streamed into Azure data centers, where predictive algorithms will identify issues of concern to airlines and their passengers.

Just a week earlier, Microsoft and GE announced a partnership that will make GE’s Predix platform for the Industrial Internet available on the Microsoft Azure cloud. GE of course a major supplier of aircraft engines, and has advertised heavily to promote its idea of embedding sensors into its industrial products.  A year ago, GE first introduced its Predix Cloud -- a platform-as-a-service (PaaS) designed specifically for industrial data and analytics. This tie-up with Microsoft will provide Predix customers with scalable infrastructure, data sovereignty, hybrid capabilities, and advanced developer and data services. In addition, GE and Microsoft plan to integrate Predix with Azure IoT Suite and Cortana Intelligence Suite along with Microsoft business applications, such as Office 365, Dynamics 365 and Power BI, in order to connect industrial data with business processes and analytics.

Microsoft has said that it is moving quickly to add intelligence and machine learning to the Office 365 product suite as well. If the company can bridge these same machine learning and Big Data analytics from Azure IoT to Office 365, then its relationship with the Fortune 1000 will become much more deeply embedded and increasing difficult for AWS to match given that Amazon lacks the Office suite to reach corporate works.

Distractions Could Be Costly

As always, with big corporations there can be big distractions.  In recent year, the Windows phone failure followed by the Nokia debacle proved quite costly to Microsoft.  With Nadella in charge, the company has hopefully moved beyond these distractions. But the recent $26 billion bet to acquire LinkedIn acquisition may take some time to demonstrate how it delivers an equivalent business value to the company.